Indian State Banks Post $2.3 Billion in Losses on Bad Loans

  • Sour loans at Punjab National Bank widen to 12.9% of total
  • Numbers show ‘rot’ in state-run banks: Equinomics Research

Delinquent loans at Indian state banks are rising unabated.

Surging bad debt and higher provisions to cover for them caused 10 Indian state-owned lenders to report combined losses of 153 billion rupees ($2.3 billion) for the March quarter. The latest was Punjab National Bank, which reported a wider-than-estimated loss of 53.7 billion rupees on Wednesday. State Bank of India, the nation’s largest lender, will report earnings on May 27.

While some investors had anticipated a central-bank audit of lenders’ loan books to result in higher nonperforming-asset disclosures, the scale of losses and statements from bank executives highlighting the uncertain outlook for bad debt have surprised analysts. Government-controlled banks account for more than 70 percent of loans in India’s banking system.

“The numbers show the extent of the NPA rot in the state-run banks,” said Chokkalingam G., managing director at Equinomics Research & Advisory Pvt. in Mumbai. “We are not recommending our clients to buy any state-run banks. We simply don’t know what the book is, so how do you value the bank?”

The loss reported by Punjab National Bank, the worst-performing stock in the S&P BSE Bankex index this year, exceeded the 857 million-rupee loss forecast by analysts in a Bloomberg survey and compares with a year-earlier profit of 3 billion rupees. The lender said it won’t pay a dividend, the first time since at least 2006 that it has skipped a payout, data compiled by Bloomberg show.

Punjab National’s gross bad-debt ratio widened to 12.9 percent from 8.47 percent in the preceding quarter, while Bank of Baroda, India’s second-largest state-run bank, reported a ratio of 9.99 percent. UCO Bank last week said its level had surged to 15.43 percent. India’s banking system had an overall ratio of 5.1 percent as of September, according to the latest data available from the Reserve Bank of India.

Punjab National, sank 2 percent in Mumbai as of 9:46 a.m. in Mumbai, taking its slump this year to 36 percent. Bank of Baroda dropped 0.8 percent, while the 10-member Bankex Index lost 0.4 percent.

Bank of Baroda reported a surprise quarterly loss last Friday as it tripled its bad-debt provisions in the March quarter from a year earlier. The lender expects to add 50 billion rupees of bad loans in the year to March 31, Chief Executive Officer P.S. Jayakumar said, though he added that profits at the lender may grow at a faster pace from the December quarter onward.

Better Disclosure

Some investors are betting a revival in global growth will help cut bad loans and revive credit growth.

“Bank are now more proactive in recognizing bad loans,” said Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India) Pvt., which has $468 million in assets. “More or less, the provisioning is over. If in the future global growth picks up and projects revive, we can even see some write backs.”

Central bank Governor Raghuram Rajan has continually warned about lenders’ hidden bad debt, and started the audit of banks’ nonperforming loans on Oct. 1 in a bid to improve disclosures of soured credit and force banks to set aside more cash to cover potential write-offs.

The end of that audit in March was supposed to have marked a turning point for bad-debt disclosures, though those expectations have since been pushed back. Fitch Ratings, which in a Nov. 3 note predicted stressed-asset ratios in Indian banks would peak by the end of the first quarter, now sees a possible “inflection point” in March of next year.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE